Yuan's Gradual Advance Allows China to Adjust, Feldstein Says: Tom Keene

The yuan’s slow advance against the dollar following its re-evaluation is meant to give China’s businesses time to adjust to the new monetary policy, according to Martin Feldstein, a Harvard University economics professor.

China’s currency, also known as the renminbi, has appreciated 0.81 percent against the dollar since June 19, when the People’s Bank of China said it would allow more flexibility in the yuan’s exchange rate. The yuan was little changed today at 6.7711.

“The government there is essentially putting the businesses there on notice that renminbi is going to strengthen and that they’ve got to be prepared for it,” Feldstein said today in a radio interview with Tom Keene on Bloomberg Surveillance.

After scrapping a peg to the dollar in July 2005, the government allowed the yuan to gain 21 percent before holding it at about 6.83 to the dollar from July 2008 to last month.

Feldstein, 70, is former head of the National Bureau of Economic Research, which determines the beginning and end of U.S. recessions. In a 2009 Financial Times article, he wrote that China’s policy of expanding domestic spending while depressing the renminbi will lead to its economy overheating.

The government in Beijing will begin to allow the currency to strengthen more rapidly to contain inflation, said Feldstein, who returned from a visit to China two days ago. He projects the yuan will gain 5 percent yearly for the next several years.

Capital Mobility

China will be slower in removing restrictions to capital mobility, according to Feldstein, referring to an article published this week in The New York Times by a fellow Harvard economics professor, N. Gregory Mankiw.

“They’re moving in that direction in small steps,” Feldstein said. “They’re opening up new markets. They’re going to let American firms list on the Chinese stock exchange, but it’s not going to happen overnight.”

China’s central bank has focused on monetary policy and control of its exchange rate, which restricts international flow of capital, according to Mankiw.

“Without such restrictions, money would flow into and out of the country, forcing the domestic interest rate to match those set by foreign central banks,” Mankiw wrote.

To contact the reporters on this story: Alex Kowalski in New York at akowalski13@bloomberg.net; Tom Keene in New York at tkeene@bloomberg.net